Some thoughts on FDI

Me not having much of a head for money matters, I had not commented on FDI in retail so far. However, I had a conversation with a friend who made several observations which seemed important to me, so sharing them here.

The friend wishes not to be named, since he works for a place supporting the exact opposite of his opinion.

FDI in Retail may mean a boost for economy on paper, but it will further increase the gap between rich and poor.

Foreign Direct Investment sounds like India getting money from other countries, but no business invests without expecting to earn more than it invests.

Large retailers bypassing retailers to source directly from farmers (for example) will make their products cheap, but that doesn’t automatically mean they will pay farmers more than middlemen.

Their ability to sell cheaper is unlikely to make products drastically cheaper for beyond an introductory period to win business. Post that, they only need to be slightly cheaper to keep sucking business away from small shops and make massive profits – corporate sector profits.

Farmers may get bulk deals that superficially sound good, but they will retain far less money per harvest.

Mass leasing of agricultural land will put farmers out of business with no real work options (less labor is needed) – increased migrations to cities.

Massive profit margins will bring ability to throttle out competition on any part of the chain by out competing. Outbidding middlemen while buying, lower pricing while selling. Monopolizing purchases from farmers and reducing their options. This will kill competition, increase corporate profits.

Even if the land is leased from a farmer, the amount of the lease is obviously going to be less than the price of harvest. This is money circulating in rural India further going to corporates.

Big retails will employ people, yes. Pay them better, yes. But it will remove far more jobs all along the food chain – from farmers to middlemen to small retail outlets. In his words, if one Walmart (don’t ask me why everyone uses Walmart as an example) reduces hiring with thirty kiranawalas, their forty employees get paid better, but ninety people lose jobs in another place – only on a much larger scale.

On paper profits will be there, but they will be concentrated with much lesser people.

The pluses that people attribute to FDI in retail are largely what the government should be doing to the country’s systems anyway, which it doesn’t, will not, so it seems tempting that the corporates will do it for sure. But corporates are not accountable like a government. Corporates are not required to look after the interests of anyone not their employee or customer.

Pluses:

Rich/Upper Middle class in city gets cheaper products – he makes this more about rich/middle class because according to him, the bulk purchases happen here – people who stock supplies. Poorer people live more hand to mouth and will stay with kiranawalas buying their 100gms sugar and “das rupaye ka doodh” as needed.

Quality can be maintained better.

Made a lot of sense, so I put it here. He also explained a lot of technical things, which I have not put here because I didn’t understand them.

But For what it is worth, my stance is now anti-FDI. I can’t ignore this.

Comments 14

Just to tell WHY everyone uses Walmart as example- Well, this is a Giant in all meanings, who once enters a country, tramples every other competitor like a enraged elephant. A supporting fact is that it earns 349 billion in overseas revenues, which is only 20% of its total revenues. Now their are other companies like Tesco (UK) Carrefour (France) Ahold (Netherlands), Metro (Germany) who are earn 40-70% of their revenues from overseas, but still Walmart with just 20% overseas share is thrice as big as its nearest competitor (Carrefour).

Just to tell WHY everyone uses Walmart as example- Well, this is a Giant in all meanings, who once enters a country, tramples every other competitor like a enraged elephant. A supporting fact is that it earns 349 billion in overseas revenues, which is only 20% of its total revenues. Now their are other companies like Tesco (UK) Carrefour (France) Ahold (Netherlands), Metro (Germany) who are earn 40-70% of their revenues from overseas, but still Walmart with just 20% overseas share is thrice as big as its nearest competitor (Carrefour).

interesting. Unfortunately most of the observations are without any basis or scientific data. Let me give you my rebuttle on this: 1. how does FDI increase gap between rich/poor? better prices for farmers, more employment , cheaper goods will in fact help the middle class and the poor. 2. so do you want investors to be NGOs? what is wrong with profit? 3.there is data to prove that Indian farments get only 30% of the retail price, middlemen take 40%. International data proves that farments earn more when middlemen removed. Even Pepsi interaction with potato growers has proved this. 4. your friend, good intentions and all, seems to know how any business will behave. there will be competition from hoegrown big retail, kiranawalas etc to avoid such situation. 5. any proof for this claim? ask him to look up how much Pepsi suppliers get. 6.is mass leasing by foreign owned cops. permitted? 7.so similarl;y, do indian large scale retailers or kiranawalas with slightly deeper pockets, drive their competotors out of business by this practice? where is the economic logic? 8.historyb in south America and far east proves that farmers have gained by FDI. 9.the employment question is based on the assumption tht all small kiranawals will close shop. Infact, Metro, a foreigh company, and bharti-walmart are great places for small shops to buy goods, for their own retail. Helps small guys actully !! Has big bazaar, reliance retail managed to close mom&pop stores? 10.where do you expect the govt. to get money for a nationwide chain of cold stores, better storage fecilities?Are you ready to pay more for your elericity, more sales tax and income tax? If not, how will the govt. get the money? 11.if corportes do not look afterv their customers and employees, how ill they survive? this arguement doesn’t hold water.

other points: 1. food wastage in transit will reduce, increasing supply. The high prices of food is a supply-side problem and can only be tackled by modern storge and selling, which the govt. cannot do. 2. the safeguards the govt. has put in will restrict the large shops from most of India. so small shops will exist there. 3. Walmart does not give credit. corner shops do. so they will survive. 4. large shops will have to be out-of -town. who will drive there for urgent small needs? so smll shops are a necessity and will actually thrive.see example fo the Indian corner shops in the UK. 5. If India does not set up scientific supply chains, we had better get used to high inflation.

anyway, by the logic of your friend, we should take India back to the socialist days. No disrespect meant to him, just to his one sided views.

I will forward your comment to him and ask him to comment here – anonymously if he doesn’t wish to use his own name.

About the potatoes…. I think it is not the same thing. Basmati rice costs more than regular rice. This doesn’t mean Basmati buyers pay the farmers “better”. I know for certain that there are qualities in potatoes (because I lived in a village which produced ones that were better and got higher prices), and chips require excellent potatoes. Particularly in terms of them being harvested and stored with greater care, cultivated so that they are low on starch, etc. The prices being high are not higher than regular potatoes – it takes more effort and expense for these chip potatoes we used to call – don’t know exact name. Whether Pepsi pays farmers more than middlemen for high quality potatoes may be a better comparison. Not that I know anything about that either.

I do know that some buyers also bought directly according to the going rate. Not being a farmer myself, I didn’t pay attention, but good idea to see if I can find out if some direct buyers give better rates.

BTW, I am speaking of buyers of high quality potatoes in general because as I know, Pepsi engages in contract farming and doesn’t “buy” as such from farmers in the sense of open buying. It is more about teaming up with farmers to produce a quality needed for chips. I don’t think this can be done with regular food grains with any need/profit.

interesting. Unfortunately most of the observations are without any basis or scientific data. Let me give you my rebuttle on this: 1. how does FDI increase gap between rich/poor? better prices for farmers, more employment , cheaper goods will in fact help the middle class and the poor. 2. so do you want investors to be NGOs? what is wrong with profit? 3.there is data to prove that Indian farments get only 30% of the retail price, middlemen take 40%. International data proves that farments earn more when middlemen removed. Even Pepsi interaction with potato growers has proved this. 4. your friend, good intentions and all, seems to know how any business will behave. there will be competition from hoegrown big retail, kiranawalas etc to avoid such situation. 5. any proof for this claim? ask him to look up how much Pepsi suppliers get. 6.is mass leasing by foreign owned cops. permitted? 7.so similarl;y, do indian large scale retailers or kiranawalas with slightly deeper pockets, drive their competotors out of business by this practice? where is the economic logic? 8.historyb in south America and far east proves that farmers have gained by FDI. 9.the employment question is based on the assumption tht all small kiranawals will close shop. Infact, Metro, a foreigh company, and bharti-walmart are great places for small shops to buy goods, for their own retail. Helps small guys actully !! Has big bazaar, reliance retail managed to close mom&pop stores? 10.where do you expect the govt. to get money for a nationwide chain of cold stores, better storage fecilities?Are you ready to pay more for your elericity, more sales tax and income tax? If not, how will the govt. get the money? 11.if corportes do not look afterv their customers and employees, how ill they survive? this arguement doesn’t hold water.

other points: 1. food wastage in transit will reduce, increasing supply. The high prices of food is a supply-side problem and can only be tackled by modern storge and selling, which the govt. cannot do. 2. the safeguards the govt. has put in will restrict the large shops from most of India. so small shops will exist there. 3. Walmart does not give credit. corner shops do. so they will survive. 4. large shops will have to be out-of -town. who will drive there for urgent small needs? so smll shops are a necessity and will actually thrive.see example fo the Indian corner shops in the UK. 5. If India does not set up scientific supply chains, we had better get used to high inflation.

anyway, by the logic of your friend, we should take India back to the socialist days. No disrespect meant to him, just to his one sided views.

I will forward your comment to him and ask him to comment here – anonymously if he doesn’t wish to use his own name.

About the potatoes…. I think it is not the same thing. Basmati rice costs more than regular rice. This doesn’t mean Basmati buyers pay the farmers “better”. I know for certain that there are qualities in potatoes (because I lived in a village which produced ones that were better and got higher prices), and chips require excellent potatoes. Particularly in terms of them being harvested and stored with greater care, cultivated so that they are low on starch, etc. The prices being high are not higher than regular potatoes – it takes more effort and expense for these chip potatoes we used to call – don’t know exact name. Whether Pepsi pays farmers more than middlemen for high quality potatoes may be a better comparison. Not that I know anything about that either.

I do know that some buyers also bought directly according to the going rate. Not being a farmer myself, I didn’t pay attention, but good idea to see if I can find out if some direct buyers give better rates.

BTW, I am speaking of buyers of high quality potatoes in general because as I know, Pepsi engages in contract farming and doesn’t “buy” as such from farmers in the sense of open buying. It is more about teaming up with farmers to produce a quality needed for chips. I don’t think this can be done with regular food grains with any need/profit.

The number of bullet points are an indication on which side the friend was pitching his tent 🙂

It is a fact that the existing supply chain has not been able to cater to the growing demands of a burgeoning population, increasingly becoming affluent and urbanised.

The constraints in the supply chains and the system of compulsory middlemen under APM regime has contributed significantly to the rising prices, even while our farmers continued to commit suicide. In any case the system cant get worse for the farmers and small producers?

Our desi retailers themselves have not been very patriotic when they sourced their goods from the worlds cheap sources (Chinese goods flooding Indian markets is an example). Nor have they looked after Indian manufacturers or farmers.

FDI is not new to India. The cash and Carry operations are existing for some years and one of the major beneficiaries are the small retailers themselves.

The condition on FDI that it is mandatory for them to create back-end infrastructure is expected to bring quality change in our retail sector

The condition that they should source certain % of their goods from SMEs is an improvement over the current procurement policy of Indian retailers.

When a sector is open to competition, it is always experienced that undue profit cannot be sustained for long. In such a case, that will surely invite more competition and there by pull down profit levels.

The limitations of population criteria placed on eligibility will substantially reduce the area of influence of the major chains, leaving vast semi-urban and rural areas in the hands of existing suppliers. This in fact ensures continuity for the existing set up and introduction of new technology and expertise at the same time.

Agree that Government could do many of the above. But as a policy we have decided to move away from the public sector investment in non-core sectors. Therefore, it is not in the scheme of things to expect Govt to make such huge investments in the sector and any source of capital must be welcomed.

No sector is free from the purview of Competition laws and jurisdiction of Competition Commission. In case any chain act smart we have the tools to ensure fair play.

This list can go on…

We have heard similar arguments against changes at the time of introduction of liberalisation, Maruti cars, computers, opening up of telecom etc etc… Dooms day theories will remain forever.

But we must concede the right of a government to introduce some administrative measures that they consider as in the interest of the national economy. Of course, if they prove wrong, we can change the government and that government can change the policy!

Thanks for your comment. The length of your reply is about which side your tent is :p

Will forward your comment to him. Maybe ask him to comment here anonymously at least, because he can explain much better (and he did, to me…)

Commenting only on your last thing about right of a govt to introduce some administrative measures. Excuse me if I think that our government is not exactly famous for thinking about the common man. The right of said common man to question what he feels is not in his interest must also be conceeded.

The number of bullet points are an indication on which side the friend was pitching his tent 🙂

It is a fact that the existing supply chain has not been able to cater to the growing demands of a burgeoning population, increasingly becoming affluent and urbanised.

The constraints in the supply chains and the system of compulsory middlemen under APM regime has contributed significantly to the rising prices, even while our farmers continued to commit suicide. In any case the system cant get worse for the farmers and small producers?

Our desi retailers themselves have not been very patriotic when they sourced their goods from the worlds cheap sources (Chinese goods flooding Indian markets is an example). Nor have they looked after Indian manufacturers or farmers.

FDI is not new to India. The cash and Carry operations are existing for some years and one of the major beneficiaries are the small retailers themselves.

The condition on FDI that it is mandatory for them to create back-end infrastructure is expected to bring quality change in our retail sector

The condition that they should source certain % of their goods from SMEs is an improvement over the current procurement policy of Indian retailers.

When a sector is open to competition, it is always experienced that undue profit cannot be sustained for long. In such a case, that will surely invite more competition and there by pull down profit levels.

The limitations of population criteria placed on eligibility will substantially reduce the area of influence of the major chains, leaving vast semi-urban and rural areas in the hands of existing suppliers. This in fact ensures continuity for the existing set up and introduction of new technology and expertise at the same time.

Agree that Government could do many of the above. But as a policy we have decided to move away from the public sector investment in non-core sectors. Therefore, it is not in the scheme of things to expect Govt to make such huge investments in the sector and any source of capital must be welcomed.

No sector is free from the purview of Competition laws and jurisdiction of Competition Commission. In case any chain act smart we have the tools to ensure fair play.

This list can go on…

We have heard similar arguments against changes at the time of introduction of liberalisation, Maruti cars, computers, opening up of telecom etc etc… Dooms day theories will remain forever.

But we must concede the right of a government to introduce some administrative measures that they consider as in the interest of the national economy. Of course, if they prove wrong, we can change the government and that government can change the policy!

Thanks for your comment. The length of your reply is about which side your tent is :p

Will forward your comment to him. Maybe ask him to comment here anonymously at least, because he can explain much better (and he did, to me…)

Commenting only on your last thing about right of a govt to introduce some administrative measures. Excuse me if I think that our government is not exactly famous for thinking about the common man. The right of said common man to question what he feels is not in his interest must also be conceeded.